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Noise trader clusters and market efficiency

Author

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  • Pantzalis, Christos
  • Park, Jung Chul
  • Wang, Pinshuo

Abstract

We posit that noise trader clusters, retail investor base configurations that are homogeneous and informationally segmented, should be associated with greater market inefficiency because they facilitate the spread of common, “local” narratives and sentiment about the stock over fundamentals and market information. Our tests confirm that noise trader clusters have significant stock pricing implications. Stocks with retail investor clusters are associated with stronger peer effects, greater delay in incorporating market information, and more idiosyncratic risk. Consistent with the notion that they are associated with greater arbitrage risk and mispricing, such stocks earn higher risk-adjusted returns and display stronger long-run reversals.

Suggested Citation

  • Pantzalis, Christos & Park, Jung Chul & Wang, Pinshuo, 2025. "Noise trader clusters and market efficiency," Journal of Behavioral and Experimental Finance, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:beexfi:v:45:y:2025:i:c:s2214635025000024
    DOI: 10.1016/j.jbef.2025.101021
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    More about this item

    Keywords

    Noise traders; Sentiment; Market efficiency; Idiosyncratic risk;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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